An accountant calculator taxes 370.
(photo credit: Ivan Alvarado / Reuters)
The Israeli government sent its budget bill to the Knesset for debate and
enactment on June 17. It is formally known as the Draft Law for Changes in
National Priorities (Legislative Amendments for Achieving Budget Objectives in
the Years 2013 & 2014) – 2013.
The intended commencement date for
most clauses is August 1, 2013. That doesn’t leave very long for advance
planning, which may often be worthwhile.
In view of the far-reaching
potential effect of the Bill on many people, we are tracking its progress. We
have commented before on some proposals but they are still evolving. It
remains to be seen what will be finally enacted and when.
to it all is the government’s deficit in 2012 of 4.2 percent of GDP instead of
the 2.2% originally planned. The commentary to the bill blames this gap on a
revenue shortfall. Therefore the aims of the bill are: to raise revenues,
enhance tax enforcement using physical and technological means and reform of the
overly complex pension tax regime.
As for immigrants and senior returnees
(lived abroad more than 10 years), they will continue to enjoy a 10 year Israeli
tax exemption for overseas income and gains under the proposals. But it is
proposed in order to make them start disclosing the exempt income and gains on
annual tax returns. However, this disclosure requirement would only apply to
those that commence Israeli residency on or after August 1, 2013. So potential
immigrants and returnees have a small incentive to get their skates on and take
up Israeli residency by July 31 – the prize is less tax return form
With regard to dividends from foreign resident companies,
immigrants and returnees will only be exempt under the proposals if the dividend
is paid out foreign-source profits. This would put paid to doing business in
Israel via a US LLC or S Corporation, for example.
With regard to trusts,
it is still proposed to tax all trusts with an Israeli resident beneficiary,
even if the settlor (grantor) is a foreign resident. However, it seems that only
income paid or allocated to Israeli residents will be taxed, at a rate of 25% or
30%. What happens if there are Israeli and foreign resident beneficiaries? We
are left to assume that income paid or allocated to foreign resident
beneficiaries won’t be taxed in Israel, but this is NOT expressly stated. The
Israel Tax Authority should have the courage to clarify this. But it is clear
that trusts will be taxed if they are settled by professionals and others who
are unrelated to the beneficiaries.
With regard to privately owned
“foreign professional companies,” Israel has long tried to tax them. However,
this is forbidden under most tax treaties unless the foreign company has a
“permanent establishment” (fixed place of business) in Israel. So Israeli
exporters with a US marketing subsidiary were shielded from Israeli tax by the
US-Israel tax treaty.
Now it is proposed to impose 26.5% company tax AND
30% income tax on the Israeli shareholders on deemed dividends, even if the
shareholders are individuals not companies.
company tax on individual shareholders seems likely to contravene Israel’s tax
treaties just like before... And it is doubtful if the Tax Authority ever tried
to calculate Israeli tax under the proposals – our spreadsheet had several loose
ends, not to mention duplicate foreign tax credits. So exporters and others with
foreign service companies, prepare to laugh and cry.
As always, consult
experienced tax advisors in each country at an early stage in specific
The writer is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.